Standing Committee A

[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

Paul Boateng: I beg to move
That, during proceedings on the Finance Bill (except Clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and Schedules 1, 3, 11, 12, 21 and 37 to 39), the Committee do meet at half-past Nine o'clock and half-past Two o'clock on Tuesdays and Thursdays when the House is sitting, other than Thursday 10th June 2004.
 On behalf of the Committee, I extend a warm welcome to you, Mr. McWilliam, and to Sir John Butterfill, as you assume your responsibilities at the commencement of our proceedings. I know that I speak for the whole Committee when I say that I particularly welcome your stewardship. You are noted for being tough-minded, but at the same time we know that, when that twinkle in your eye appears, you are about to extend a latitude that, having looked around me, I have no doubt many Committee members will take advantage of.

Mark Prisk: Surely not.

Paul Boateng: I fear so.
 I also know, Mr. McWilliam, that your co-Chair, Sir John, will add his particular style and experience to the Committee, not least because, many years ago, a number of us had the pleasure to serve with him on a Finance Bill. Even though on the Government side, he demonstrated a capacity to speak at some length in the furtherance of the entirely justifiable cause of widows who had found themselves at a disadvantage as a result of a financial instrument that was causing many of them to lose their homes. Such was the length at which he spoke that it caused a certain amount of alarm at that time—way back in 1988—on the part of the then Government Whip. I very much hope that none of my colleagues will follow his example in that respect, because my experience is that disturbing the peace of mind of the Government Whip, my hon. Friend the Member for Poplar and Canning Town (Jim Fitzpatrick), in any way is likely to have extremely unfortunate results. I fear that Labour Members will not be emulating Sir John in that respect. 
 On our part, I also extend a particularly warm welcome to the hon. Member for Arundel and South Downs (Mr. Flight), who leads for the Opposition on the Committee. As a noted City expert, he brings a depth of experience and knowledge to the proceedings. Joking apart, he always participates fully and with a great deal of knowledge and warmth in the debate. 
 My right hon. Friend the Paymaster General will lead on the Bill and will do so, I think, in a way that demonstrates her mastery of successive Finance Bills. I 
 think that she has the longest record of any Minister as a leader of proceedings on the Government side in a Finance Bill. We will particularly welcome her leadership. 
 Looking around me at those who sit on the other side, I think that it would be wrong for me not to mention one old stager, who is not present this morning but will be joining the Committee at some stage. I refer to the hon. Member for Grantham and Stamford (Mr. Davies). He has been around for some time. I remember serving with him in the early 1980s on the Finance Bill. He is an object lesson to several of the younger Members sitting on the Opposition Benches. They knew who they are—I do not feel the need to point them out or name them. We on the Government Benches know them as the Beastie Boys—Beastie as opposed to beastly—of the Conservative Benches. They are led by an hon. Member who, although young and very much a Beastie Boy, has risen to some prominence in the course of his brief political career. He has left his mark on the stamp duty land tax as a result of his contribution in opposition to myself the last time the Committee sat. 
 We welcome the contribution of all right hon. and hon. Members—a contribution that will be faithfully recorded by Hansard, whose representative we also note in his place and welcome. The Clerks, who are particularly experienced, will keep contributions perpetually in order. I say that advisedly, Mr. McWilliam, because I note that from time to time the Clerks stir into life, and even the most experienced of Chairs—

John McWilliam: Order. It is my job to keep things in order, and if the Clerk stirs into life and says a word, it is because we are very old friends.

Paul Boateng: I see. That is a very helpful explanation of the signs of life that are so occasionally demonstrated by your distinguished Clerk, Mr. McWilliam, whom I would also count as an old friend.
 This is an important Committee, on which we all value sitting, and we all look forward to the hours and days of proceedings that lie ahead.

Howard Flight: May I add our welcome to your chairing our deliberations, Mr. McWilliam? I know that it will be humorous as well as firm. May I also add a welcome to Sir John Butterfill. With 158 pages of pension legislation, it is appropriate that he should join you, Mr. McWilliam, given his own background and specialist knowledge. I thank the Chief Secretary for his kind and, I might say, fruity and patriarchal words.

Paul Boateng: Fruity and patriarchal? I am not sure I like that.

John McWilliam: Order. Nothing unparliamentary has been said so far.

Howard Flight: I also welcome the Paymaster General. I believe that this is her 10th Finance Bill, and as I have said in the past, I greatly admire her grasp of tax law, even though I may not agree with her views. It is my fifth Finance Bill, so I am still quite a youngster,
 relatively. May I also add our welcome to the Financial Secretary and the Economic Secretary? At 574 pages, this will be a long Bill.
 I express my particular pleasure at being joined by my team on the Opposition Benches. As the Chief Secretary said, my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) was very much blooded by his experience with the ghastly stamp duty land tax provisions. I am delighted to have my neighbour and hon. Friend the Member for Chichester (Mr. Tyrie) here, who has the advantage of knowing the Treasury from the inside, and my hon. Friend the Member for Tatton (Mr. Osborne), who will be working on and contributing to the new, 158-page pension regime. 
 We also have invaluable support from Conservative Members of Parliament with great experience, including my right hon. Friend the Member for Fylde (Mr. Jack) and my hon. Friend the Member for Grantham and Stamford. My hon. Friend the Member for South Norfolk (Mr. Bacon) brings the discipline of the Public Accounts Committee to the proceedings. I add my welcome to our Liberal Democrat colleagues, the hon. Members for Yeovil (Mr. Laws) and for Torridge and West Devon (Mr. Burnett). As time goes by I am more and more of the impression that they should join us: we have a lot in common. I also welcome the Clerk—who will have to put up with my tabling activities for another three months—the police and the officials. 
 There will be some important debates during consideration of this year's Bill, particularly in relation to the new pension regime, and perhaps there will be less agreement on the various new avoidance disclosure measures. There are a lot of technical measures, some of which have not been thought through fully. As we begin considering the Bill, I would just comment that there is a tendency for tax legislation to go down the route of ''Let's have something that you can use to hit everything,'' when there may not be the intent to use it other than in situations of perceived wrongdoing. I feel that such a legislative approach is wrong, because it can put a lot of innocent employees in a difficult position, but we will get into the meat of that in due course. I thank you, Mr. McWilliam, for looking after us.

David Laws: I, too, welcome you to the Chair, Mr. McWilliam, and I thank the Chief Secretary for his comments. We look forward to him and his team playing an important part in our debates during the next few weeks. I join the shadow Chief Secretary in paying tribute to the work that the Paymaster General has done on Finance Bills over the years. To serve on Committees considering 10 Finance Bills is quite a record. Only the Chief Secretary can advise us what she has done to deserve such a sentence, but we look forward to her part in the debates, and we welcome other Labour Members who have been given the great opportunity to serve on the Committee. I am also grateful to the shadow Chief Secretary for his kind, if somewhat frightening, words, and I welcome him and his excellent team to the debate.
 The Bill is not one of the greatest political Finance Bills of all time. Indeed, some would say that in parts it 
 is even on the dull side. I hope that our debate will be more constructive that it might have been if we were dealing with a more political Finance Bill. I hope that we can tempt the Chief Secretary and his colleagues, including the Economic Secretary, to be more generous than they would be if they were dealing with a more political Finance Bill in taking on board amendments and improvements where they seem to be justified. 
 Question put and agreed to. 
 Resolved, 
That, during proceedings on the Finance Bill (except Clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and Schedules 1, 3, 11, 12, 21 and 37 to 39), the Committee do meet at half-past Nine o'clock and half-past Two o'clock on Tuesdays and Thursdays when the House is sitting, other than Thursday 10th June 2004.

John McWilliam: I thank hon. Members for their warm welcome.
 I have several announcements to make. First, copies of the Ways and Means and money resolutions agreed by the House, on which the Bill is founded, are available in the Room. 
 In view of the resolutions of the House relating to the declaration of interests, right hon. and hon. Members are required to declare relevant interests when they table amendments as well as when they speak to them. Copies of the rules are available from the Clerk. I suppose I had better declare an interest: as I am retiring at the next general election, the pensions clauses are of particular interest to me. As usual, because of the quantity of paperwork, boxes are available to store papers between sittings and hon. Members who make use of that facility should note that the cabinet that contains the boxes will be locked when the Committee is not sitting. 
 I remind the Committee that adequate notice of amendments must be given. Neither I nor my co-Chairman will as a rule call starred amendments, including any that may be reached during an afternoon sitting. 
 I give a health warning on the briefings that hon. Members may have had from various people. Sometimes, those who try to brief Committees do not realise that there are rules on how we go through the Bill, and that it is therefore not in order to discuss something that is not being considered by the Committee at a particular time. It becomes especially complex when we are dealing with groups of amendments. 
 Finally, I ask everyone to switch off their mobile telephones and refrain from using electronic devices. 
 Resolved, 
That the order in which proceedings in Standing Committee on the Finance Bill are to be taken shall be: Clauses 1 to 3 and 6 to 19; Schedule 2, Clauses 21 to 27 and 29; Schedule 4; Clause 30; Schedule 5; Clauses 31 to 41; Schedule 6; Clauses 42 to 47; Schedule 7; Clause 48; Schedule 8; Clause 49; Schedule 9; Clauses 50 to 52; Schedule 10; Clauses 53 to 56 and 78; Schedule 13; Clauses 79 and 80; Schedule 14; Clauses 81 to 84; Schedule 15; Clause 85; Schedule 16; Clause 87; Schedule 17; Clause 88; Schedule 18; Clause 89; Schedule 19; Clause 90; Schedule 20; Clauses 91 to 110 and 112; Schedule 22; Clauses 113 to 127; Schedule 23; Clause 128; Schedule 24; Clauses 129 to 134; Schedule 25; Clause 135; Schedule 26; Clause 136; Schedule 27; Clauses 137 to 155 and 157; Schedule 28; Clauses 156 and 158; Schedule 29; Clauses 159 to 168; Schedule 30; Clauses 169 to 193; 
Schedule 31; Clauses 194 to 205; Schedule 32; Clauses 206 to 267; Schedule 33; Clauses 268 and 269; Schedule 34; Clauses 270 and 271; Schedule 35; Clause 272; Schedule 36; Clauses 273 to 281 and 290 to 307; new Clauses; new Schedules; Clause 308; Schedule 40; Clauses 309 and 310.—[Mr. Boateng.]

Clause 1 - Rates of tobacco products duty

Question proposed, That the clause stand part of the Bill.

John Healey: I welcome you to the Chair, Mr. McWilliam. It is a pleasure to serve under your co-chairmanship. I know from experience that you are fair and firm, and I look forward to seeing that twinkle in your eye to which my right hon. Friend the Chief Secretary referred earlier.
 I also look forward to the scrutiny process that the Committee is about to embark on and to our debate with hon. Members on the Opposition Front Bench. I notice that the Liberal spokesman, the hon. Member for Yeovil, is virtually sharing the Front Bench. I trust that the physical positioning does not presage a political repositioning, even though the hon. Member for Arundel and South Downs might welcome it. 
 Clause 1 increases the excise duty on all tobacco products in line with inflation, raising the duty on a typical packet of 20 cigarettes and on a 25 g pack of hand-rolling tobacco by 8p, and increasing their cost by 9p when VAT is added. 
 The increase supports the Government's desire to reduce smoking prevalence by maintaining the real price of cigarettes. Smoking is the single greatest cause of preventable illness in the UK: it is responsible for the premature death of about 120,000 people every year. 
 The effects of tobacco are not restricted to smokers: a recent report by the British Medical Association entitled ''Smoking and Reproductive Life'' stated that studies showed links between smoking and fertility problems, cervical cancers, miscarriages and low birth weight. The report and its statistics underline the case for reducing the prevalence of smoking. As a result of the real terms duty increases introduced by the Government and previous Administrations, tobacco prices in the UK are at an historically high level. A decision this year to raise duties in line with inflation in the Budget will maintain their real price and thereby continue to encourage people to smoke less or to quit altogether, and to discourage children and young people from taking up the habit. 
 We believe that we can achieve those results without increasing smuggling, and since the introduction of the strategy to tackle tobacco smuggling three years ago, which my right hon. Friend the Chief Secretary played an important role in launching, Customs has succeeded in halting the growth in cigarette smuggling to the UK, and last year exceeded the target we set it yet again, restricting the illicit share of cigarettes still further to 18 per cent., compared with 34 per cent., the projected level of the illicit market if no action had been taken to counter the problem.

David Laws: The Economic Secretary has mentioned that the Government have been successful in reducing the smuggled share of the market to 18 per cent. in 2002–03, which is a particular achievement when one considers previous trends. Does he have any projections for that share of the market over the next couple of years? Does he expect it to reduce further, or merely to stabilise at the existing level?

John Healey: The hon. Gentleman may know that we have set a public service agreement target for 2006 for Customs to bring down further the illicit share of the market to 17 per cent. Compared with three years ago, when we were faced with a steeply escalating market share for illicit tobacco, Customs has succeeded in halting the rise, stabilising the level and now driving down the size of the illicit market. He may be interested to know that during the three years that the anti-smuggling strategy has been in place, Customs has seized 7.3 billion illicit cigarettes destined for the UK market, disrupted 190 tobacco smuggling gangs, and protected an estimated £3 billion of revenue for the public purse and the taxpayer.

Mark Prisk: The Economic Secretary has rightly highlighted Customs and Excise's welcome successes in these measures. Can he confirm to the Committee that 27 per cent. of all tobacco consumed here is non-UK duty paid? The worry is that that masks hidden smuggling and counterfeiting.

John Healey: The hon. Gentleman will find that the volume of illicit tobacco and cigarettes that finds its way into the UK with no UK duty paid is greater than 27 per cent. Our main tobacco smuggling problem comes not from travellers from the European Union, where they may pay duty at other EU member state rates, but from large-scale organised smuggling through freight. In most instances, the tobacco and cigarettes that are smuggled by freight have no duty paid anywhere before coming into this country.
 I can confirm not only the progress that we have made to date but that we are seeking to reduce the illicit market share further in future years. We shall maintain concerted pressure on all aspects of the illicit market and take further measures where they become necessary to restrict the supply of illegal cigarettes. However, this duty increase continues the Government's twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of the illicit market. Together, we believe that these measures will help to reduce smoking and lower the financial, social and personal costs associated with it. On that basis, I hope that the Committee will endorse and support the clause.

Mark Prisk: I add my welcome to you, Mr. McWilliam. I shall not continue your embarrassment with references to your eye and whether it twinkles, but we know that you will be able to guide us when we stray from the straight and narrow. I also welcome the Economic Secretary. We have debated, one might perhaps argue too frequently in the past 10 days or so, but it is always a pleasure, and he is always determined to ensure that we have a full debate, which is to be welcomed. I also welcome the hon. Member for Yeovil
 and his move to the right—if it is not political, it is certainly a physical move, although the former would be most welcome as well.
 It is a daunting task to consider clause 1, and the forthcoming 310 clauses and 574 pages of the Bill. I always feel that Room 10 is appropriate for us to consider it, because behind you, Mr. McWilliam, is a magnificent illustration of Alfred inciting the Saxons to prevent the landing of the Danes. Occasionally, as an Opposition spokesman dealing with the size of the Finance Bill, one cannot help feeling some sympathy for Alfred's position. 
 In this year's budget, as the Economic Secretary said, the Chancellor increased duty levels on cigarettes and other tobacco products by the rate of inflation. I think that it was the third or fourth Budget in a row in which such a change was made. The Minister explained to us the reason behind it, which is reaffirmed in a statement in the Red Book that accompanied the Budget: 
''Smoking remains the greatest cause of preventable illness and premature death in the UK. Maintaining high levels of tax helps to reduce overall tobacco consumption.''
 I doubt that any member of the Committee wishes to challenge the first of those two sentences. However, there is a serious question, which I hope we can consider in the debate, about the evidence that high duty levels have reduced overall consumption in any meaningful way. 
 Tobacco duties in this country must be seen in the context of the international tax environment. For our near neighbours in the European Union, a packet of 20 cigarettes generally costs between £1.85 and £3.40, depending, of course, on the brand; here, the equivalent packet costs about £4.60 to £4.75. The large price differential between neighbouring countries is worrying. It will, as the Minister said, continue to create significant opportunities for smuggling, fraud and counterfeiting. 
 The question, therefore, is whether high duties and increases cut consumption. We have to consider the industry figures and the Government figures to try to ascertain whether they do. Let us consider the industry figures in particular. The latest figures are for 1993 to 2003, and it is clear that there has broadly been stability. There was a small rise in 1999–2000. We are not sure whether that related to the millennium, but in 1993 the figure for consumption was about 99 billion cigarettes or their equivalent, and the figure is broadly the same this year. 
 The Committee will be interested to learn, however, that there was a much greater difference in the previous 10 years. In 1983, the figure was about 113 billion and it dropped to 99 billion. The 1970s saw the greatest change: in 1973, the figure was about 153 billion and it fell over the following 10 years to about 117 billion. I suspect that we have seen a natural reduction in the number of people smoking and are left with a hard core of smokers who are not likely to stop their habit. They may wish to change the way in which they consume the product, but they are unlikely to be deterred significantly. The figures produced by 
 Customs and Excise and the industry reinforce that assumption. 
 It is fair to say that duty rises over the past three or four years, including the one set out in the clause, have created stability in the sense of the tax revenue. In the past four or five years, the Government have pulled in about £8 billion in tax revenue. However, it is not clear from any independent evidence or evidence from the Government that the tax changes have made any significant difference in terms of cutting overall consumption. What has changed in the past few years with regard to supply is the counterfeiting—which of course is run by organised crime—and the level and nature of cross-border purchasing. It is difficult to know how to measure that and to judge whether the changes made by the Government have had an impact. 
 According to the Government's figures, there has been one interesting change, which the Committee will wish to note. The estimated revenue loss that the Government have endured has changed radically. In 1997, they were losing about £60 million in revenue; by 2002–03, the figure had risen to £1.41 billion. There has therefore been a big change in purchasing habits. As all members of the Committee will be aware, people are opting for cross-border cigarette purchasing, which is very different from what they were doing just seven years ago. 
 Equally, there has been a dramatic change in the nature of illegal activity, with a shift from smuggling to counterfeiting. The Economic Secretary referred to Customs seizures in his opening remarks, and last year some 41 per cent. of them involved counterfeit goods. In the previous year the figure was just 15 per cent, so there has clearly been a change in the nature of organised crime. I fully accept that some of the steps that Customs and Excise has taken on smuggling have had good results, and I am sure that the Committee supports that. 
 The problem with counterfeiting is that it means that, whether one's views on the totality of the product are positive or negative, consumers do not know what they are buying. The danger is that the carcinogenic elements, for example, may be far greater in the counterfeit product, but the consumer will not know. As such, there is a worry that the shift in the supply habits of organised criminals from smuggling to counterfeiting goods is serious for the consumer. 
 My point is that the tax rises in this Budget and the past few Budgets have done one thing: changed but not reduced habits. On the consumer side, smokers have not cut their consumption in the past 10 years. They are buying abroad, switching to cheaper brands and, by the sounds of it, willing to buy counterfeit goods. The point is that the total consumption is static, so the tax rise has not achieved the Government's apparent aims. At the same time, on the supply side, organised crime seems to have been just as active, but has changed its activity from smuggling towards counterfeiting. That is clearly a more sophisticated activity, but one that is nevertheless highly profitable. 
 How does the Economic Secretary feel that the increase in price helps to tackle organised crime and cut total consumption? Those two aims are laudable, but it is not clear that the policy set out in the clause will achieve them. I hope that we will be able to have a proper debate about that. I look forward to receiving the considered thoughts of the Economic Secretary.

David Laws: I hope not to detain the Committee on every clause, but clause 1 covers a particularly important issue that merits consideration.
 I start by saying to the Economic Secretary that I accept that the background to the debate is the long-term and considerable political consensus in this country that tobacco duties should be raised to reduce the incidence of smoking and to provide what has become a good revenue source for the Exchequer. 
 Looking at some of the, as ever, excellent briefing notes produced by the House of Commons Library, I note that the support for higher tobacco duties has been broad-based over the years. Debating the Finance Bill in 1994, the then Chief Secretary to the Treasury, now the right hon. Member for Kensington and Chelsea (Mr. Portillo), described the position of that Conservative Government: 
''Our tax philosophy is to tax alcohol and tobacco at quite a high rate. That position has been shared across the parties over the years. In return, we do not extend our value added tax base as broadly as many other countries.''—[Official Report, Standing Committee A, 24 February 1994; c. 379.]
 When the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), spoke in the 1996 Budget about the large increases in tobacco duty and the escalator that was introduced to continue those increases over time, he said that they were 
''necessary masochism in the wider public interest''.—[Official Report, 26 November 1996; Vol. 286, c. 168.]
 It is fair to say to the Economic Secretary that the policy that he is introducing and defending has been followed by all predecessor Governments for a considerable time. It is fair to note that neither the Conservative party nor the Liberal Democrats have tabled amendments suggesting that the rise in tobacco duty in line with inflation this year should not go ahead or that there should be a reduction in duty. 
 However, the comments made by the hon. Member for Hertford and Stortford, and those that I shall make in a moment, suggest that there is cause to consider whether the Government's strategy is still working and delivering the intended benefits, to what extent their strategy is being undermined by smuggling, which remains a large problem notwithstanding recent progress, and the fact that the European single market has widened with the recent accession of eastern European countries. In a market where it is more difficult to maintain barriers to trade, there is a major question mark about whether the Government's duty differentials can be sustained in a way that delivers public health objectives. 
 The Economic Secretary mentioned the extent of recent Government success against smuggling. There were concerns several years ago that smuggled cigarettes could account for one in three cigarettes consumed in this country. The Government have had success with their strategy, particularly in ensuring that the projected increase in the smuggled share has not been realised. However, I am sure that he will acknowledge that the figures showing the proportion of tobacco and cigarettes consumed in this country that are non-UK duty paid, because they are either smuggled or brought in through cross-border shopping, are dramatic and shocking. Even with the progress in the Government's smuggling strategy, 27 per cent. of tobacco consumption in the UK—more than a quarter—is non-UK duty paid. 
 On the basis of Government figures, which are open to debate, the share of smuggled tobacco is down to 18 per cent. That is still only a few percentage points below the high of 2000–01, and it is a higher share of the overall cigarette market than the 1999–2000 figure of 17 per cent. We do not know how successful the Government's strategy will be. The Economic Secretary said that there was a public service agreement target to reduce the smuggled share to 17 per cent. by 2006. That would be only a 1 per cent. reduction from the current share over a few years, which does not suggest that the Government are confident that they will be successful in driving down the smuggled share over the years ahead. 
 What is happening about the other part of the non-UK duty paid trade: cross-border shopping? That has significantly increased over the past few years, as one might expect in the context of an EU single market in which it is increasingly difficult for the Government to impose limits on the amount of tobacco and alcohol that people bring back across borders, not least after recent rulings. I remind the Economic Secretary that, according to my figures, although there has been a peaking out in the smuggled trade in cigarettes, the share of cross-border shopping has almost doubled from 5 per cent. to 9 per cent. over three or four years. 
 Given the recent publicity about the duty differential between the UK and other EU countries and the entry into the EU of eastern European countries with far lower levels of duty on cigarettes, one must assume that the share of the non-UK duty paid market will increase. Therefore, there could still be a rise in the share of the overall tobacco market that is non-UK duty paid. It would not take a very large increase in that share to get us to something like one in three cigarettes—one in three units of tobacco—evading UK duty. That is a pretty dramatic failure by anyone's terms to impose a UK duty on a UK product. It raises the question whether, in a single market, where barriers to trade are necessarily coming down, it is possible to maintain that strategy in the way that previous Governments desired. 
 When we look at some of the other figures for the non-UK duty paid market we can see how dramatic developments have been over a slightly longer time scale. The figures going back to 1993 show that the non-UK duty paid element of the overall market was pretty small: 3.5 billion cigarettes out of a total market 
 of 88 billion. In 2003 the figure was 20.5 billion out of a total of 74 billion, which is a massive percentage increase. 
 The figures in the hand-rolled market are even more striking. Some 10,000 tonnes of hand-rolled tobacco are consumed in the UK each year, and in 2003 70 per cent. of that was non-UK duty paid. The Government were unable to collect their duty on 70 per cent. of one product market. It is no surprise, as the hon. Member for Hertford and Stortford indicated, that the Government's strategy to reduce tobacco consumption is suffering because many people are able to bring in non-UK duty paid tobacco from other markets. 
 We can also reflect on the success or lack of success of the Government's policy on tobacco consumption when we look at the long-term figures for tobacco consumption in the UK over the past 40 years. There has been a marked decline in the post-war period. The graph that I am looking at has figures only since 1973. Between 1973 and 1992 there was a 50 per cent. decline which took place at a time when the affordability of tobacco went up by 60 per cent. because of the movement of income in relation to tobacco taxation. That is an indication of some of the non-UK duty and non-price factors affecting tobacco consumption. They may be far more significant than the Government's chosen weapon of tax increases. 
 After 1992 two different Governments brought in escalators on tobacco. In 1993 the Conservative Government introduced an escalator of 3 per cent. It came in after a period of massive downtrend in tobacco consumption. After its introduction, rather than falling tobacco consumption initially stabilised. When the present Chancellor increased the escalator to 5 per cent. in 1997–98 there followed the first sustained increase in tobacco consumption for many years. Bizarrely, at a time when tobacco taxes have increased by something like 58 per cent. in real terms, tobacco consumption has stabilised and even increased, so the strategy of relying on increases in taxation and price to reduce tobacco consumption seems to have been notably unsuccessful of late. One reason may be that the increase in tobacco taxation, instead of bearing down on consumers' demand, has precipitated a huge increase in smuggling and gone hand in hand with an increase in cross-border trade at a time when the European single market has allowed consumers to bring tobacco from abroad without having to worry about traditional trade barriers. 
 When one looks at the differential between UK tobacco prices and those in other EU countries, one understands the incentive to smuggle and the reason that consumers bring tobacco back from abroad. The average price in the UK for a pack of 20 cigarettes is around £4.65, and the EU average is closer to between £2.20 and £2.70. In the countries that are joining the EU at the moment, such as Poland, average prices are even lower, at around 74p a packet, compared with £4.65 in the UK. That is a massive incentive to smuggle in a single market, and we may be confronting the difficulty within a single market of nations running their own tax policies regardless of those in other countries. That does not lead me to say, as Labour 
 Members may try to tempt me to say, that we should harmonise taxes. In practice, it is refreshing tax competition, the effect of which helps to hold down tax levels in some countries when others have taxes that are way out of line. 
 I have read in the newspapers, even since the recent entry of the eastern European countries into the EU, a number of stories about disappointed consumers returning laden with tobacco from countries such as Poland and discovering that the Government, or perhaps the EU, had introduced measures to prevent them from bringing back the quantities that they can from other EU countries. No doubt, Customs has done good business and good work in preventing citizens who, deliberately or unintentionally, bring back quantities of tobacco in excess of the permitted amount, but one questions, first, whether that will lead to additional smuggling and, secondly, whether it will be a new factor that will put even further pressure on the Government's strategy on tobacco taxation. 
 When one looks at the policy in the round, one sees that during a long period after the war there was a decline in tobacco consumption despite tobacco becoming more affordable, but in recent years, when both Conservative and Labour Governments have increased tobacco taxes particularly rapidly, consumption has stabilised and even increased, indicating that those policies have not been very successful. That raises two questions. First, can we continue to rely on higher taxation and prices to deter consumers, or should we use different mechanisms, and should that include a bigger role for the Department of Health, rather than the Treasury? 
 The second question, on which I shall touch only briefly—I can see that the Economic Secretary is impatient to rise to his feet to respond to our concerns—is what precisely is the cost of maintaining the duty differential? Even if we assume that the Government's policy is still successful in raising more revenue than would be raised if they reduced tobacco taxation to the EU average, what is the cost of having to police the existing system and what is the lost revenue consequent on almost one cigarette in four or, in future, one in three being non-UK duty paid? What is the cost to the taxpayer and the policing services of the organised crime rings that are making a huge amount of money from such activities, some of which may be routed into other undesirable areas, including, for all we know, terrorism?

Michael Jack: The hon. Gentleman questioned the current duty regime on tobacco products and suggested that an alternative way of controlling the problem of consumption of tobacco would be through the Department of Health. If, as a result of the proposal he puts forward, there were to be a revenue loss, what alternative means would his party adopt to raise the missing money?

David Laws: That is a good question. It highlights the need for the Government not only to assess what the costs are but to evaluate the implications of reducing the taxation of tobacco. The right hon. Gentleman will be aware that, prior to 1997, the right hon. and learned
 Member for Rushcliffe had to consider that issue in relation to the taxation of spirits. It was argued that that could be reduced without losing revenue, because it was so high.
 At that time, organisations such as the Institute for Fiscal Studies supported the proposition that the tax on spirits could be reduced without losing revenue. As far as I know, the institute has not yet argued that a similar outcome could be achieved by reducing tobacco taxes. However, the factors that we are discussing—smuggling and cross-border trade—have begun to bear on the issue only in the past few years, and it is possible that the revenue implications of changes in duty might change rapidly while the debates continue.

Rob Marris: Speaking from memory, I believe that in 1999 the province of Quebec lowered the excise on cigarettes because of cross-border smuggling, particularly from native people's reserves, and found that consumption of tobacco increased markedly. The province therefore put the excise duty back up because of the health implications.

David Laws: I shall not take on the hon. Gentleman on the subject of Canada, on which he is a world expert, and about which he speaks frequently in our debates. However, he should accept that the recent use of tobacco taxation in order to reduce tobacco consumption has not been a success in the UK under this or the previous Government. The Chancellor recognised that by ending the escalator on tobacco taxation. I am not trying to make a party political point, because I believe that that move was supported by all the political parties, including mine.

Chris Bryant: It seems to me that the hon. Gentleman's argument is a syllogism. If one were to reduce duties, as he suggests, to compete with other countries in Europe and to eliminate the trend—although he has not suggested a figure to which those duties should be reduced—that would incur the risk of significantly increased consumption, as pointed out by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris). That is the element of the hon. Gentleman's argument that cannot be proved.

David Laws: The assumption that the hon. Gentleman appears to make has not been well borne out by evidence. Not only over the past decade, but over the past 20 or 30 years, significant declines in consumption do not appear to have been related to affordability. Recently, this Government and their predecessor have had an excellent opportunity to carry out an experiment in increasing taxation to reduce consumption, but that has been a notable failure. Consequently, the Government and all other political parties, including my own, have changed their policy of increasing the real taxation of tobacco. I suggest that hon. Members of all parties should come to terms with an economic situation that is different from that which we faced a decade ago.
 I hope that the Economic Secretary will be able to say something in his response about the revenue that is 
 lost, the crime that is stimulated, the costs, which must be significant, of trying to police the smuggling, and the costs that are faced by legitimate businesses in the UK, particularly in the south-east, as a consequence of the fact that so much of the tobacco business is now non-duty paid. Those are new factors that any Government should take into account—the fact that neither the Conservative party nor the Liberal Democrats have tabled an amendment indicating that we believe that duty should be reduced by a particular amount shows that no political party has yet come to terms with the implications of those recent trends. 
 I suggest to the Economic Secretary, who I have no doubt will need to defend the Government's position, that the Government, in partnership with the Department of Health, take the opportunity over the next year or two to consider the issue of tobacco consumption, to see whether the tax policies that we have pursued for the past 10 or 20 years have been successful, to consider the implications of the single market on the Government's strategy in this sector, and to see whether we need a new strategy on tobacco consumption that is less dependent on maintaining duty differentials with other countries in Europe, which increasingly seems unsustainable without unacceptable criminal trade and unacceptable cross-border trade.

Howard Flight: I declare an interest: I am probably the only person present who has been smoking for more than 40 years.
 The current strategy, which has been adopted by Governments from the two main parties, has run out of steam. No one is yet putting in place a new strategy and no one has modelled the effect on consumption or revenues of moving duty in the other direction. However, it must be acknowledged that the strategy has ended its useful life. From the figures, it is obvious that tobacco consumption has been unchanged for roughly a decade. It has not gone down. If anything, it might even have gone up a bit. The proportion of cigarettes and tobacco on which duty is not paid—either because purchases are made at cheaper duty rates in the EU or because of smuggling—has also remained roughly static at about 69 per cent. for hand-rolled tobacco and 27 to 28 per cent. for cigarettes. We are stuck in a groove. 
 The figures that I have seen for loss of revenue put it in the order of £4.4 billion per annum. There are projections that need to be done. Would moving somewhere else on the duty supply and demand curve lead to an increase in consumption, as in Quebec, and would the change be more than offset by a decline in the volume of non-duty-paid tobacco? 
 My major concern about setting the price higher and higher is that it is incredibly regressive. A large proportion of smokers are single women, and in particular single mothers, who are often the least best placed to afford to pay huge sums on tobacco. It would be worth having a study into where the concentrations of smokers are, but I am aware that among young people there is a rising trend for girls, more than boys, to take up smoking. 
 We are kidding ourselves if we think that putting up duty, even at the rate of inflation, is a strategy that will work. That strategy is five—perhaps even 10—years past its sell-by date. Although none of us has an alternative to suggest, it is unwise to continue with the current approach when it is no longer achieving its objectives.

John Healey: We have had a useful and measured debate, but the arguments have been somewhat overstated by the hon. Members for Yeovil and for Arundel and South Downs. They claimed that there has been a breakdown in consensus that has existed over the past couple of decades about the role of high prices in helping to drive down and constrain consumption, and declared that the role of duty levels, and therefore of price, as part of a strategy is past its sell-by date.
 There is little serious doubt that, under Conservative and Labour Governments, high duty levels have played a part in high prices and that they have helped to reduce the prevalence of smoking from about 35 per cent. of the population in the early 1980s to about 26 per cent. now. Clearly, as the proportion of the population who smoke is reduced, gains become increasingly hard to deliver. Nevertheless, there has been a fall of about 2 per cent. during the past 10 years, continuing a slower but general trend. Common sense and our modelling indicate that consumption would rise if we were to cut the price by cutting the duty, as hon. Members have urged. That would run counter to health objectives, on which I believe there is still consensus. 
 I reject the argument that the strategy is at the end of its useful life, as the hon. Member for Arundel and South Downs said. I made it clear that it is not the only answer but that it plays a part in maintaining pressure on the level of consumption. It also plays a part in our overall approach, particularly the strategy that that the hon. Member for Hertford and Stortford welcomed and said was successful, to clamping down on smuggling and the illicit marketing of cigarettes and tobacco on which duty has not been paid.

Mark Prisk: It is important to tease out answers on the efficacy of the policy, because the end aims, particularly in respect of illegal supply, are crucial. It is not clear from what the Economic Secretary just said whether it is the confident view of the Government that continuing to increase the duty on UK-purchased tobacco products cuts overall consumption. That assertion was made in the Red Book that accompanied the Chancellor's decision, but we have not heard it from the Economic Secretary.

John Healey: The provisions will increase the duty on tobacco by the rate of inflation. They do not increase the high rate but maintain it. In other words, they are part of maintaining, not increasing, the price and thereby maintaining pressure on the level of consumption. That is only a part of our strategy for dealing with the health risks and damage from smoking and the problem that we faced in severe form three or four years ago of increasing levels of smuggling and, therefore, criminal and illicit market activities, and of loss of revenue to the Exchequer.
 It is important to distinguish between the nature and scale of the illicit market in tobacco and cigarettes and the nature and scale of products that are legitimately purchased in other EU member states by UK consumers. We are absolutely clear about, and strong in our support for, the right of EU citizens to shop for and bring back as much tobacco as they want for their personal use without paying UK duties. 
 It is important to bear it in mind that we are not alone in using cigarette duties and prices to achieve health objectives that we share with other Governments. Since January 2002, prices have risen in Australia by 11.6 per cent., in Belgium by 20 per cent., in France by 39 per cent., in Germany by 20 per cent., in Ireland by more than 21 per cent., in the Netherlands by nearly 30 per cent. and in Portugal by more than 19 per cent. In that same period, the UK's duty rates and prices have been constant in real terms. The equivalent price rise in the UK has been just 8 per cent. 
 The other important conclusion to draw is that the increased cross-border shopping that has taken place during that period is not necessarily driven, as hon. Members argued, by an increasing differential in duty rates between the UK and other EU states, because the differential has reduced in EU countries where shopping is most prevalent.

Mark Prisk: Will the Economic Secretary enlighten the Committee as to what has driven that process? In relation to cross-border shopping, tax revenue loss has increased from £60 million in 1997 to £100,410 million. That is a huge change. Is he going to argue that that is simply a consequence of cheap flights? What analysis have the Government carried out on the subject?

John Healey: There are three contributory factors. One is the change in travel patterns, the second is the change in shopping and consumption patterns and the third is the move that we made as part of the second phase of our tobacco strategy in October 2002 to raise the minimum indicative levels—the guideline levels—for tobacco and cigarettes that UK citizens can bring back to the UK from other EU states. Customs will use those guideline levels in making a judgment about whether people are bringing back excise goods for their own use. That has helped Customs to distinguish between the genuine shopper and traveller, and the regular smuggler and bootlegger.
 I now turn to the issue of counterfeit cigarettes, which the hon. Gentleman rightly raised. He rightly detailed the recent rise in the trade of such cigarettes. Counterfeit cigarettes pose the problems he suggests. They may carry increased health risks, and are generally completely untaxed and unregulated. There is some evidence—he cites Customs' own operational evidence and figures—that organised criminal gangs are increasingly switching to the smuggling of counterfeit cigarettes rather than legitimate goods with no duty paid. 
 We are working closely with the UK industry. Understandably, it shares our concern about counterfeit goods. They undermine the brand integrity and identity of the companies and their 
 markets. We are now targeting gangs that are beginning to smuggle counterfeit cigarettes. We disrupt their supply chains where we can and try to increase their costs and reduce their profit margins. We are targeting the source countries where such goods are produced and we are using our overseas network of Customs officers to tackle the problem. 
 The hon. Member for Yeovil tried to argue at one point that the success of the anti-tobacco smuggling strategy during the past three years demonstrated that it was not ambitious enough in the first place. In doing that, he undermined the seriousness of the problem that we face and, therefore, the importance of putting the strategy in place.

David Laws: Even with the success of the Government's smuggling strategy, by 2006, over a quarter of the tobacco market in the UK will still be non-duty paid. Given that the Government have acknowledged that we are in new circumstances and have moved away from the tobacco escalator as a consequence, is there not an argument—without prejudice—for the Government to investigate the issue during the next couple of years? The Treasury could do that in partnership with the Department of Health to consider whether we have the right strategy and to see whether it can be sustained in the new circumstances of a large single market.

John Healey: I will come to the point that the hon. Gentleman wishes to introduce about EU duty rates, but tries to qualify with the words ''without prejudice'', in a moment. As he would expect, we are refining the modelling that we use to analyse the dynamics of this complex set of factors. We are continually analysing that with academics. It is clear that, if you significantly reduce the duty level and therefore the price of tobacco or cigarettes, you will reduce the revenue to the Exchequer and inevitably impact on consumption levels, which will increase.
 The hon. Gentleman tried to say that our PSA target of a 17 per cent. share for the illicit market in cigarettes by 2006 was somehow unambitious. That target was set at the start of the current spending review period. If we had taken no action, the projections are that that share would have reached 34 per cent. last year. It was set when we were facing a rapidly escalating illicit market share, and it was generally viewed as a pretty tough, not soft, target for Customs. 
 As the hon. Gentleman would expect, publication of part of the current spending review in the summer will include new PSA targets for Customs for the year ahead, and as part of that process we are examining the question of illicit tobacco and cigarette market share and the scale of smuggling.

David Laws: May I press the Economic Secretary on the need for a joint inquiry with the Department of Health? Although his models indicate that, if you reduce the price of tobacco, you will increase the demand for it in the short term, they have to be set against the fact that many other EU countries with far lower tobacco taxation and prices have far lower
 tobacco consumption. That may indicate that factors other than price and taxation are more important in the long term.

John McWilliam: Order. ''You'' means me in this Committee, and I have no intention of increasing or reducing anything.

John Healey: I will come on to the points that the hon. Gentleman raised earlier and tried to raise again in an intervention.
 I do not accept the argument for a joint inquiry with the Department of Health into the matter. I refer the hon. Gentleman to the recent report by Derek Wanless, which, with its careful scrutiny, makes an important contribution to the issue. 
 The hon. Gentleman, in his argument about Europe and European prices, is trying to have his cake and eat it. That is pretty typical of the Liberal Democrats. Whatever he says without prejudice, it is clear that he makes strong arguments for tax harmonisation across Europe.

David Laws: Competition.

John Healey: The logic of the hon. Gentleman's arguments and his critique of the problems that we face lead us very easily to see him as a tax harmoniser.

David Laws: Will the Economic Secretary give way?

John Healey: No. Let me finish this point. The hon. Gentleman asked about the price of cigarettes in other European countries. It was a shame that no one from the Front or Back Benches of his party was in Committee last week when we considered the question that he now asks about the position of the 10 accession countries that have just joined the European Union. We considered price levels in those countries and—he obviously is not aware of this—the basis for maintaining quantitative cigarette restrictions on travellers from eight out of those 10 countries.
 There was no Liberal in that Committee. We had a full debate as it was a very serious issue, and it dealt with some of the questions that the hon. Gentleman has raised this morning. For his information, we discussed the fact that in Latvia the current price of a packet of 20 cigarettes is 40p; that in Lithuania it is 55p; and that eight out of those 10 countries have taken advantage of a derogation that allows them to avoid setting the minimum duty rate for tobacco, which European rules insist upon, for a period in which they bring their own levels up to the European minimum. The hon. Member for Hertford and Stortford played a very important part in the scrutiny of that measure. 
 That Committee discussed and agreed that the UK was right. Indeed, other member states from the original 15 have taken advantage of an agreement that allows us to maintain quantitative restrictions on the number of cigarettes and the amount of tobacco that people bring back from those countries until they meet the minimum duty levels. 
 The hon. Member for Yeovil asked for figures on cost. If the UK were to reduce our tobacco duty levels to that of the EU 15 average and not include the 10 accession states, the cost would be between £2 billion 
 and £2.5 billion. As the right hon. Member for Fylde put it so succinctly, it is down to those who advocate that move to explain where revenues would be raised from to compensate for the revenue that was not available for the public purse.

David Laws: Will the Economic Secretary give way?

John Healey: I will give way to the hon. Gentleman if he is going to answer that question and I look forward to his answer.

David Laws: It is a perfectly legitimate question. I am grateful to the Economic Secretary for raising it. Is he willing to publish the research that underlies the figure about the expense of reducing tobacco tax to the European average? Will he also publish his assumptions about the implications for other costs, including policing costs? I think that that would allow us to have a more sensible debate about what is not an easy issue.

John Healey: The figures that I draw on to make those calculations are clearly available.

David Laws: Where?

John Healey: The calculations are not that difficult. The hon. Gentleman needs only to look at the duty rates levied in the other 15 EU states and the duty rates levied in this country and make his own calculations. It is fairly straightforward.

David Laws: Will the Economic Secretary give way?

John Healey: No. I am going to finish.
 On the question of policing costs, I am not sure that the hon. Gentleman is sure what he is asking. The Government invested £209 million in the strategy to tackle the funding problem that we had three years ago. Having brought the share of the illicit cigarette market down from what it would have been last year—34 per cent.—to 18 per cent., we are determined to drive it down further still. 
 That is money well spent, because it safeguards and protects £3 billion to the public purse, reduces illicit and criminal activity in this country and helps to protect legitimate traders such as newsagents and retailers, whose livelihood in part depends on their ability to continue to sell licit duty-paid tobacco products.

Howard Flight: Is the Minister saying—and is the present position—that the overall policy on duty on tobacco should be to optimise tax revenues?

John Healey: I think that I have been clear. As with a number of decisions about tax policy, concerns about revenue and protecting the public purse form a part of the decision, but important concerns about health and levels of smoking are part of the decision that the Chancellor makes each year about duty levels on tobacco. We are concerned to take into account the potential impact on smuggling and criminal activity. It is a judgment based on an assessment of those factors, with a number of objectives in place for the Government, not simply a question of revenue to the public purse, important though it is.

Richard Bacon: I did not realise how much fun the clause was going to be. If it is any augury of what is to follow, I look forward to
 the collective chance to poke fun at the hon. Member for Yeovil, especially from a sedentary position. Before my hon. Friend the Member for Arundel and South Downs intervened, I was about to ask the Economic Secretary a similar question. If, as a consequence of the clause, people such as my hon. Friend have to pay through the nose for cigarettes, is not the issue mainly about getting the cash?

John Healey: The hon. Gentleman asked the same question as the hon. Member for Arundel and South Downs and I refer him to the answer that I gave. We are determined to drive down levels of tobacco consumption in this country. I look forward to the personal contribution that the hon. Member for Arundel and South Downs will make to that decline in due course.
 My hon. Friend the Member for Poplar and Canning Town was not impressed by the hon. Gentleman's suggestion that the debate on this clause may somehow set a precedent and pattern for the remaining clauses. My hon. Friend would be concerned about our progress if it did. On that basis, I hope that the Committee will support clause 1. 
 Question put and agreed to. 
 Clause 1 ordered to stand part of the Bill.

John McWilliam: Before we move to clause 2, I should point out that it has been drawn to my attention that the clock is not working. To avoid any doubt, we will go by the time on the House of Commons Annunciator rather than the House of Lords Annunciator—they are not always in synch.Clause 2 Rate of duty on beer

Clause 2 - Rate of duty on beer

Question proposed, That the clause stand part of the Bill.

Mark Prisk: We have had an excellent and surprisingly thorough debate on the issue of tobacco. We now turn to the question of beer. The comments that I shall make about beer are equally applicable to clause 3 on wine, and I do not intend to deter the Committee further. Deter? I mean ''detain''. It is obviously still early in the morning, and talking about beer at 10.15 am—or 10.16 am according to the House of Lords Annunciator—is questionable.
 We note the rises that the Government propose in the clause; I have received no significant representations against those decisions. However, I have three brief questions. First, will the Minister confirm that following the freeze on beer duty in 2001–02, revenue received by the Government rose and the industry benefited from a rise in sales? Secondly, what estimates has the Treasury made of the total impact on Government revenue? As with cigarettes, there has been a change in consumer behaviour: there has been a switch from licensed trade sales to off-licences as the total tax burden has risen. The figure for the latter rose from roughly 23 per cent. of sales to 39 per cent. between 1993 and 2003—that is a big shift in the way that people buy beer. Given that off-licence VAT revenues are 
 approximately half those of pubs, what studies, if any, has the Minister commissioned on the total impact on revenues of a further rise in the duty charge? Finally, will he tell us how the approach fits into the Government's overall strategy on alcohol?

John Healey: I hope that I can answer the hon. Gentleman's points during my brief remarks on the clause. Clause 2 increases the rate of excise duty charged on beer by 3.01 per cent. in line with general inflation. As the hon. Gentleman said, that has generally been accepted, and I, like him, have received no fierce representations against the rise. Excise duties on alcohol provide a crucial £7 billion a year for investment in public services and other Government spending. Beer accounts for more than 40 per cent. of alcohol duty receipts. The inflation-only increase, which together with VAT is equivalent to about a penny a pint, is necessary to maintain an important source of revenue. Since coming to office in 1997, the Government have made no real-terms increases in beer duty. This modest increase, which is a freeze in real terms, comes after freezes in beer duty in three of the previous five Budgets.
 As with tobacco, it has been said that our levels of excise duty on alcohol are too high in comparison with those of continental European neighbours and that the inflation-only increases will somehow strengthen the motivation to buy beer and wine on the continent. Our commitment to the right of individual citizens to shop freely across borders in the EU for consumption for their own personal use is absolute. It is important not to view excise duty in isolation. A large proportion of cross-border shopping by the British is done in Belgium, the Netherlands and France, and it is true that those countries generally have lower rates of excise duty on alcohol. However, figures from the Organisation for Economic Co-operation and Development show that the UK is a relatively lightly taxed economy with one of the lowest total tax burdens in the EU, certainly far lower than the average. 
 The hon. Gentleman asked specifically about the level of revenue receipts following previous Budget decisions. If he cannot find the references in the Red Book—I cannot do so immediately—I will write to him with them. He points to a significant shift in the way in which people buy their beer, from on-trade to off-trade. I have discussed that with members of the all-party beer group in Parliament and the British Beer and Pub Association. It is a matter of concern to the pub and drinks industry and of interest to the Treasury. We are doing what we can to track and analyse the matter, and the industry has undertaken some useful analysis. 
 The matter does not lend itself easily to fiscal decisions that might follow because it is not easy to see how it might be possible to distinguish between on-trade and off-trade sales in determining fiscal policy. My conclusion is that there is a significant shift in consumption patterns which we need to understand, but we have limited scope in fiscal policy terms to influence that or to respond directly.

Mark Prisk: I understand that the Minister may not be able to pursue policy further, but I am not clear whether the Government have assessed the overall problem. Clearly, if one set of taxes is raised, there will be a knock-on effect on other taxes, and I assume—the Minister may contradict this—that the Government have looked at the total revenue. If a change made to one fiscal measure has a detrimental effect elsewhere, the Government could end up in deficit in tax terms. What studies have been commissioned?

John Healey: As I said, we have discussed the matter with the industry in recent months and we have looked at the industry's analysis of shifting consumption patterns. I would not describe it as a problem, as the hon. Gentleman does, but it is clearly an emerging feature. We are studying, analysing and assessing it as it becomes clear.
 I am aware that there is, in part, a shift that is contributing to the pressures on the beer and pub industry, which plays an important part in the economy, our heritage and, for those of us who like a pint or two, our leisure time. This is a modest, inflation-only increase, which recognises the industry's concerns but maintains an important stream of revenue that is necessary to maintain our commitment to improving public services. I hope that the Committee will support the measure. 
 Question put and agreed to. 
 Clause 2 ordered to stand part of the Bill. 
 Clause 3 ordered to stand part of the Bill.

Clause 6 - Road fuel gas

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: We have a battery of clauses on hydrocarbons coming up, and I shall not make many general comments about them, except to say that it seems to me that the underlying purpose of virtually all of them is to raise revenue. We had a reminder yesterday that the Transport Minister wants to tax people out of their cars.
 I have taken a close look at the clauses and my impression is that, when one scratches the surface, one finds that many of the environmental arguments are slightly less rigorous than they initially appear. We have already had a good canter around clause 5 on the Floor of the House. I should at this point alert the Committee to my interests, which are listed in the Register of Members' Interests. As far as I am aware, none could possibly be said to conflict with the clause or any other clause that will be considered in Committee. I worked for BP some 20 years ago, so I have a vague idea about these hydrocarbon clauses and I have reacquainted myself with some of the terms over the past few days.

John McWilliam: Order. Some 30 years ago I looked after the lines going into the Grangemouth refinery. I do not think that that gives me an interest either.

Andrew Tyrie: I am sure that we will find out more about your deep knowledge of this subject, Mr. McWilliam, as we examine these eight clauses.
 As the Minister will no doubt explain, the clause deals with liquefied petroleum gas. Its main effect is to increase the LPG duty by almost 45 per cent., from 5.4p per litre to 7.82p per litre. My biggest worry is the effect that that will have on the LPG market. The case against the Government's action has been emphatically summed up by the chief executive of the Retail Motor Industry Federation, Matthew Carrington, who said: 
''The duty increase on LPG could be the beginning of the end for the fuel in the UK. This anti-green measure is a backward step environmentally. It could be a death-blow for the fledgling LPG market, and could destroy public confidence in the viability of all alternative fuels.''
 He went on to say: 
''At a time when we are all being encouraged to think beyond conventional fuels, it seems paradoxical that the government would take away any incentive to try alternatives, especially since it was the government that encouraged us in the first place.''
 That leads to a number of questions, which I should be grateful if the Minister could answer. What is the Government's long-term intention for LPG? Do they have a long-term policy? Where can we find it in a form that looks credible if the Minister does not present it to us today? Why have the Government reversed the freeze that they introduced in 2001? There has been a complete reversal of policy in four years. I will give the Minister time to think about those. 
 No doubt a brief has already been prepared for him on the question about 2001; I have been trying to think of some explanations for the change myself. First, the Government might intend to encourage people out of LPG and into biofuels because another effect is to narrow the differential between the two. Another possibility is that the Government believe that the industry has now invested enough to make it self-sustaining to switch to LPG, so they can afford to raise rates. If that is the explanation, it is not the majority view of those who were recently consulted. Finally, I ask the Minister to comment on the fact that the majority of respondents in that consultation wanted to see no change in these key differentials.

Rob Marris: I welcome the increase in excise duty on LPG. I am not an expert and the right hon. Member for Fylde will perhaps correct me, but I do not think that LPG is nearly as clean as its proponents claim, particularly in terms of its outputs of carbon monoxide and nitrous oxide. There were some interesting figures in The Sunday Telegraph about two months ago, indicating that LPG vehicles pollute more than petroleum vehicles—not in every case, but there are significant differences. That gap has increased historically to the point where LPG vehicles have been, to coin a phrase, overtaken by petroleum vehicles due to developments in petroleum technology in vehicles, particularly cars.
 Those developments include the common rail diesel engine and Volkswagen's FSI high-pressure petroleum engines. LPG vehicles are now passé technology—a road transport dead end in terms of environmental 
 friendliness, because they burn more fuel per mile. A few years ago, there was an excise incentive for their use, because they were then thought to be less environmentally damaging than petroleum engines. That is no longer the case, and I welcome the increase in excise. It is unfortunate for those who have invested in that technology—whether individuals or the industry—but it is a dead end and the Government have rightly recognised that. They are right to put up the excise duty and should increase it by more.

Michael Jack: May I at the outset remind the Committee of my business interests, which I fully declared on Second Reading? It is a pleasure to be under your chairmanship again, Mr. McWilliam.
 The hon. Member for Wolverhampton, South-West reflected some arguments that I have made in my advocacy of improved fuels for diesel engines, such as biofuels and bioethanol, which we shall come on to later. He is right: it depends where one starts. I should like to ask the Economic Secretary, when he responds to the debate, to justify why 40p was chosen as the rate that will now reduce the inducement for people to run on liquefied petroleum gas. 
 The hon. Member for Wolverhampton, South-West is right to point out that natural gas-driven vehicles have detriments, particularly carbon dioxide emissions, and are not as good as the best of modern diesel engine technology. In terms of air quality and certain pollutants that have an adverse impact on health, particularly in congested city centres, LPG has a good case to make. It would appear that the Government considered that health improvement objectives have a higher value and that LPG should attract a higher level of discount than biodiesel. When the LPG discount came in, that generation of diesel engines was not as well controlled as modern ones are today. 
 If we are to understand the logic of the Government's alternative fuel policy, can the Economic Secretary tell us in detail why the rate of 40p has been chosen? What is the logic of the numbers that have been selected, and why is the clause drafted in that way that it is? Has the Treasury done any research to justify the change, and if so, will he lay it in the Library of the House of Commons, so that we can understand with greater clarity the way that the Government are approaching the new fuel world in which we are operating? We are going to debate aspects of bioethanol, and that relates to the question of the future approach towards the hydrogen economy. It also touches on clause 1 of the Energy Bill, which deals with the Government's obligations on national fuel security; it comes before the House next Monday. I look forward to detailed and specific responses to the questions that I have posed.

John Healey: I shall try to respond to the points that have been raised; they are important in helping to set the context for the proposal in clause 6. I should say first to the hon. Member for Chichester that Matthew Carrington has form in the view that he might take of policies originating from the Labour Government. The hon. Gentleman quoted Matthew Carrington, so I shall quote three other sources, which are just as, or arguably more, informed and more
 representative of the views of those affected in the industry by the measures that we propose.
 Howard Kerr, whom I met in the run-up to the Budget decision, is managing director of Calor Gas Ltd. and chairman of the LPG Association. He said that following the Budget announcement, Calor was looking further to expand the number of refuelling sites in the UK. Clive Mather, chairman of Shell, said that the stability offered will enable it to 
''continue investments to further develop this market . . . it sends a clear and welcome signal to industry regarding investment in other cleaner alternative fuels.''
 Tom Fidell, director general of the LPG Association, wrote after the Budget decision to thank us for what he described as 
''striking the right balance with respect to the duty rate adjustment.''
 I submit that the measures are not likely to drive the industry out of business in the way that Matthew Carrington apparently believes. 
 I caution my hon. Friend the Member for Wolverhampton, South-West against placing too much reliance on figures that he reads in the Sunday papers. The industry is not a dead end in terms of providing road fuel for the future, and we can make environmental gains through greater use of LPG fuel. However, it is relatively less green than it was in 2001, and the environmental gains are relatively less substantial than they were then. In part, that answers the point made by the right hon. Member for Fylde. I refer him and the hon. Member for Chichester to December's pre-Budget report and the Budget documentation. They set out the logic of the policy that we are pursuing and the results of the research and consultation that we conducted in reaching the principal decision in the pre-Budget report and deciding on the specific duty in the Budget and clause 6.

Andrew Tyrie: Does the Minister believe that the industry has invested enough in the LPG sector for it to be self-sustaining?

John Healey: I will make some specific points about the development of the industry later. However, since we made the commitment on duty rates in 2001, we have seen a sustained increase in investment in the industry, an expansion in the number of retail outlets for LPG and an expansion in the fuel's use and production. Alongside the industry's investment, the Government have made an equally substantial investment in seeing the industry establish itself and begin to flourish.
 In the Budget decisions, we were keen to avoid alterations in the duty rate that, although justified on environmental grounds, would have led to the industry taking the sort of nosedive that Matthew Carrington argues it is about to do. We want to see the continued development of, and investment in, the industry, which the chairman of Shell and others clearly see in prospect. The Government will continue to support the development of the industry in several ways, including the PowerShift programme and the duty rate discount. 
 The comments so far have concentrated on liquid petroleum gas, but in the pre-Budget report last year, we announced that we would treat natural gas differently from LPG. Clause 6 creates a separate rate of duty for natural gas used as a fuel in road vehicles and increases the rate of duty on LPG and other gases used as fuel in road vehicles. 
 In the pre-Budget report in December, we published the alternative fuels framework, which included our principles for setting duty differentials for environmentally friendlier alternative fuels. At the heart of that is the principle that support for fuels from the Government and taxpayer will be based primarily on the environmental benefits that they offer. Reflecting that, we announced in the Budget that the duty differential for LPG would have to be reduced over time towards a level that is more commensurate with its environmental benefits, and that the duty differential for natural gas would be frozen at its current rate until at least 2007.

Michael Jack: Is the Economic Secretary prepared to place in the Library the detailed formulations that show how the environmental benefits to which he has referred are calculated? Clearly, there is a range of alternative fuels. The Department for Transport is running a consultation exercise on these matters, and it would be helpful to know how the value of the gains is calculated.

John Healey: I will undertake to look back at the pre-Budget report and the Budget documentation. We have published the results of the consultation and of the research and analysis that we have done on the environmental benefit and the implications for duty changes. Those judgments and analyses underpinned the production of the alternative fuels framework. If I believe that they do not answer the right hon. Gentleman's question, I will certainly do as he suggests.
 I recognise that clause 6 marks a departure from the policy that we established in 2001, but it reflects our desire to assess and respond to the changes that have occurred over the past few years and to set tax rates accordingly. When we made the commitment in 2001, few vehicles used natural gas or LPG. Since then, the market has developed. Natural gas vehicles need large fuel tanks, so the fuel is typically used by larger vehicles, such as delivery vehicles and buses. The fuel does not generally lend itself to private motorists and cars. Natural gas vehicles can deliver significant environmental benefits as compared with diesel vehicles, particularly in terms of noise reduction in urban areas late at night and early in the morning. 
 LPG is used differently: it is more commonly used in cars. As I hope the Committee will recognise, the UK can be proud of the growth in the industry since 2001. More than 100,000 such vehicles are on the road, and drivers throughout the country have access to the fuel. LPG vehicles still offer some environmental benefits, but traditional petrol and diesel vehicles—the benchmark against which we measure them—have got cleaner, as the right hon. Member for Fylde said. There have been genuinely impressive advances in engines and vehicle technology. Today's vehicles have 
 a much lower climate change and air quality impact, even compared with the situation four years ago. 
 As I hope I have explained, we are no longer comparing like with like. We have decided to treat the two fuels differently, because the vehicles in which they are used are different. The differential for LPG will be reduced to reflect better the environmental benefits that it offers. In line with the alternative fuels framework, we have set out how that will happen. There will be a reduction of 1p a litre in 2004 and a further reduction on the same scale in 2005 and 2006.

Andrew Tyrie: Can the Minister clarify whether the reduction in the differential is driven entirely by a reassessment of the relative environmental benefit derived from LPG?

John Healey: Our starting and principal point is an assessment of the environmental benefit that the fuel delivers, relative to alternative fuels. However, a number of other factors come into play in such decisions. A concern to see continuing investment and the industry flourishing is part of our Budget judgment. A concern to see a continuing expansion in the number of drivers using LPG vehicles and in the number of refuelling stations at which it is available is also an element. However, our principal point of judgment revolves around the environmental gains that may come from LPG, precisely as we set out in the alternative fuels framework in the pre-Budget report in December.
 The changes in clause 6 mean that the rate of duty for LPG will be 13.03p per kilogram from 1 September this year, which is equivalent to a differential of 40.7p per litre between LPG and main-rate road fuels. The rate is still almost 2p per litre lower than it was in 1997. 
 I emphasise that the decision was taken after extensive and detailed consultation with the industry. I am therefore confident that it is the correct decision, which strikes the right balance, as the director general of the LP Gas Association said. We cannot support the fuels at any cost, but we must appreciate that some certainty and stability in the industry is necessary to allow it to plan its expansion and to invest for the future. Setting out the differentials three years ahead goes a long way to giving firms the certainty that they need. 
 Government and industry have invested heavily in the LPG industry in the past four years, and with the UK's manufacturing expertise, a good-size fleet and the infrastructure, the industry is well placed to meet new challenges in the period ahead and set for further expansion in the years to come. I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 6 ordered to stand part of the Bill.

Clause 7 - Sulphur-free fuel

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: The clause separates sulphur-free fuel from other ultra-low sulphur fuels, creating a new class of product that from September will attract duty at half a penny less than ultra-low sulphur fuels. I understand that initially only a few motorists will have access to it, but since it will be mandatory under EU law to use the fuel from January 2005, with a four-year transition period, there will be a major change in respect of sulphur-free fuel.
 I have few queries about the proposal, mainly because the policy is already cast in stone; the Government have signed up to it and it would be difficult for them to shift away from it, even if they wanted to do so. However, I was struck by some of the comments made in our previous debate, which are relevant to the clause. I accept that the Government face the problem that the technology of what constitutes environmentally friendly fuels is constantly changing, which makes it difficult for them to develop long-term policies on the issue. On one hand, the industry wants stability, on the other the rates that need setting may have to be varied to encourage use of the right sort of fuel. 
 For almost 20 years I have been worried that the environmental impact assessments, and the assessment of the costs and benefits of many of the changes, have not been fully examined. There is a cost-benefit analysis of the switch from ultra-low sulphur to sulphur-free fuel, but I am not convinced by it, as it was not a particularly robust analysis. The hon. Member for Wolverhampton, South-West, who is listening carefully to the debate, made a similar point about LPG, which may or may not be correct; neither of us knows for sure. Has the proper analysis been carried out? 
 I make one general plea to the Minister. It is that he should require much greater attention and resources to be given to such issues by the Treasury. It is vital for better studies to be undertaken than at present. 
 To bring that point home, it is a fact that sulphur-free fuel is more aromatic, and the more aromatic a fuel is, the more carcinogenic it is likely to be. Probably for that reason, the clause contains a limit on the aromatic content of ultra-low sulphur fuel, whereas it proposes no limit on the aromatic content of sulphur-free petrol. By implication, therefore, that could lead to much higher levels of carcinogens becoming part of sulphur-free fuel. I am not convinced by the documentation that I have seen that a full cost-benefit analysis of those health effects was carried out when assessing whether it was worth moving from very low sulphur fuel to sulphur-free fuel. The Government need to devote more resources to that area. Is the Minister clear that the change will have an overall economic benefit and, if so, what is that benefit? 
 We will have to implement such a policy sooner rather than later, because we have to obey an EU directive. In that context, will the 0.5p differential introduced by the clause be enough to secure a switch? I believe that, in consultation, most of the industry believed that something nearer 1p would be required. How long do the Government intend that the incentive should last? Do they intend to alter it, if they do not 
 see immediate effects? Is it intended that the incentive should cover the whole cost of the conversion from ultra-low sulphur fuels to sulphur-free fuels?

John Healey: As the hon. Gentleman mentioned, the clause introduces definitions of sulphur-free petrol and diesel and enables us to introduce the differential for those fuels, as announced by the Chancellor in last year's Budget. The differential will mean that the duty on sulphur-free petrol and diesel will be 0.5p per litre less than that for ultra-low sulphur petrol and diesel.
 The movement of the market towards replacing ultra-low sulphur fuels with sulphur-free ones is, in anyone's book, a major undertaking for the oil industry. Since the introduction of the differential was announced in the 2003 Budget, the industry has worked hard to install hundreds of millions of pounds worth of sulphur-removal plants at UK refineries, and to ensure that those more environmentally-friendly fuels will be available to the motorist. 
 As a result of the efforts made by the industry and the Government, the UK will be leading the way in Europe in this area. The hon. Gentleman said that he understood that very few people would have access to sulphur-free fuel in September, but we expect sulphur-free fuels to be widely available from 1 September. We estimate that sulphur-free diesel should be available everywhere from September and that sulphur-free petrol will fully replace ultra-low sulphur petrol by the end of the year. That estimate has been confirmed by the UK Petroleum Industry Association. 
 The hon. Gentleman mentioned the European directive. By introducing these measures with regard to the fuel supply in the UK, we will be well ahead of what is required of us by the directive, which requires us to make the switch by 2009. 
 When we announced the differential for sulphur-free fuels, there was some scepticism about whether that would lead to the kind of market switch that we wanted. However, I am confident, from what the industry is now telling the Government, that those fuels will be available throughout the UK. That was certainly the case when we made the switch—driven similarly by duty differentials—to the ultra-low-sulphur fuels a couple of years ago. We have listened to the industry on implementation and, in particular, on how the definition should be formed in law so that there are no barriers to the fuel coming on to the market. We will pick that up when we consider clause 9. 
 Motorists will benefit from sulphur-free fuels because they will bring significant improvements in air quality, as well as major savings in carbon dioxide emissions. Above those environmental benefits, sulphur-free fuels will also assist the development of petrol-injection engines in cars. When used in engines such as direct-injection engines, sulphur-free fuels can produce fuel savings of between 2 and 4 per cent., compared with ultra-low sulphur fuels. In the long term, sulphur-free fuels offer not only environmental benefits, but genuine savings to motorists by giving more miles to the gallon through more efficient 
 engines. The new rates come into effect on 1 September this year, when duty rates will be revalorised and ultra-low-sulphur fuels increased by 0.5p a litre above that level. 
 Question put and agreed to. 
 Clause 7 ordered to stand part of the Bill.

Clause 8 - Definition of ''fuel oil''

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: The clause is a relatively minor anti-avoidance measure and should not detain the Committee for too long. The measure is designed to capture in tax the atmospheric residue that is left after the refining process. As far as I know, only one product will be affected by the measure: PULSAR, which is being sold by a relatively small number of companies. The Economic Secretary will be able to confirm whether that is the case—I think that I have already had that confirmation.
 I have only one question of substance: are there any other perceived abuses—that is clearly what the Government consider is going on in this instance—which the Government intend to bring into the duty charge under the proposed statutory instrument? The clause falls into a category in which a relatively general anti-avoidance measure is introduced to cover a very specific issue. As my hon. Friend the Member for Arundel and South Downs said much earlier, he deprecates clauses that can have more general effects. I would like clarification from the Economic Secretary.

John Healey: The clause enables the Treasury to amend the fiscal definition of fuel oil by statutory instrument. The Government intend to use the measure to extend the scope of the duty on fuel oil to encompass a class of hydrocarbon oils known as atmospheric residue. I confirm that its principal effect will be on PULSAR.
 In taking this step, we are following the principle of internalising environmental costs into prices, or, in other words, making the polluter pay. From 1 September 2004, duty on fuel oil, which is a high-sulphur fuel used in electricity generation and in industry, increases to 6.24p a litre, but there is a loophole in the current fiscal definition that allows fuels classed as atmospheric residue to escape duty altogether. Since atmospheric residue is in direct competition with conventional fuel oils, there is a clear distortion of the marketplace as well as a resulting loss in revenue to the Exchequer. Before we use the power to remove that anomaly, we must ensure that the revised definition of fuel oil is robust, clear and does not result in any unnecessary regulatory burdens. 
 I can confirm to the Committee that Customs officials will be speaking to the industry during the coming months to find the best solution. The process will require consultation with the industry, drafting of regulations and formal consideration in Parliament. Therefore now is not the time to examine the drafting 
 of regulations, but I can confirm to the hon. Member for Chichester that our intention is to deal with this single fuel. The provision will allow us to do so with other fuels in the future because we want to have the capacity to respond to new fuels as they are developed and come on to the market. We have no other products in mind at present. 
 If we conclude that a duty differential for lower sulphur fuel is justifiable as a result of further discussions with the industry, we shall use the power under the clause to amend the definition to coincide with the introduction of a differential. I anticipate that the time scale will take us into the autumn. We shall conduct the consultation with industry with all possible speed and minimum delay. On that basis, I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 8 ordered to stand part of the Bill.

Clause 9 - Mixing of rebated oil

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: This is a concession to allow the mixing of fuels, and deal with the excise on the mixing of fuels. It gives oil companies certainty about the duty rate and is welcome for that reason. The clause need not detain the Committee for long. It replaces provisions that were made in legislation in 1996, which charged duty when two road fuels of differing duty rates were mixed. The clause removes those provisions in an attempt to simplify the introduction of new, more environmentally friendly fuels. We shall not oppose it on this side of the Committee.
 I have only one question of substance, and I would be grateful if the Minister answered it. Is the clause intended to provide a permanent concession in the rules or will it apply for only a short, transitional period? Will the Minister give us some confidence that this concession on the mixing of fuels will remain on the statute book unaltered?

John Healey: The clause underlines our continuing commitment to promoting the use of cleaner, environmentally friendly fuels. It is designed to aid the smooth introduction of sulphur-free fuels. Those cleaner fuels will come on-stream in the UK well ahead of the EU imperative to do so, as we discussed under clause 7.
 At first glance, the clause may appear to be more substantial than it is. It replaces and updates an entire section of the Hydrocarbon Oil Duties Act 1979. In doing this, the sections covering road fuels are omitted, thereby allowing the mixing of fuels and aiding the introduction of sulphur-free fuel. The problem we faced and the problem raised by the industry, to which the clause is a response, is that under the current duty system for hydrocarbon oils duty is charged when two road fuels of differing duty rates are mixed together. The rules were originally introduced as an incentive to make new fuels available to the consumer and ensure that environmental benefits were not lost by mixing cleaner fuels with 
 lower-grade alternatives. However, in reality, the mixing provisions have hindered the introduction of new fuels. Some mixing will inevitably and always occur at filling stations, and the additional duty has discouraged oil companies from making a rapid changeover. 
 In September, with the introduction of sulphur-free fuels, the UK faces its biggest changeover of fuel since the introduction of ultra-low sulphur petrol and diesel. We have therefore reviewed the measures that may be required to ensure a smooth transition. 
 I have discussed the matter at least twice with the Association of UK Oil Independents and received representations from it in the in the run-up to the Budget, as it felt that the change in clause 9 was needed to enable its members to make the switch. The clause removes the hindrance of the mixing provisions and it will ensure a smooth changeover to sulphur-free petrol and diesel. 
 The clause also rationalises the existing rules on mixing non-road fuels, which remains prohibited. The clause is permanent. It is introduced to aid the changeover and it will smooth and accelerate the transition to sulphur-free fuels from September. Its main use will be in the transition period, but it will remain on the statute book if the Committee agrees to it. The Government believe that the clause will assist the oil industry and help to meet consumer demand for sulphur-free fuels, which we all want, more quickly. On that basis, I commend it to the Committee. 
 Question put and agreed to. 
 Clause 9 ordered to stand part of the Bill.

Clause 10 - Bioethanol

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: This is a much more substantial clause, and it has potential long-term implications for a major section of the market. I am sure that the Economic Secretary has become one of the country's leading experts on the subject, but, luckily, we already have another of the leading experts present in Committee, my right hon. Friend the Member for Fylde. I have no doubt that he will have some thoughts to pass on about bioethanol, as he has in past Finance Bills, so that makes me chary about making too many points that he can make far more forcefully.
 The clause creates a new reduced rate of 28.5p per litre for bioethanol when used as any type of engine fuel. It currently attracts about 47p, so the clause creates a 20p differential, which will come into force in January 2005. Its purpose is to encourage a sharp increase in the exploitation of bioethanol as a fuel, and in that respect it is well behind biodiesel, the rates for which we briefly discussed on clause 5 on the Floor of the House. 
 I am a bit worried about the measure, not because I disagree with the direction of policy in principle, but because I am not sure that the decisions that have been taken relate successfully and directly to the policy intentions. First, where has the justification for 20p 
 come from? After I consulted the industry, it told me that to get the market going we need a differential of between 28p and 34p—a good deal more than 20p. The industry sometimes overcooks the books, but that is a very big difference in estimated costs, and the Government could have analysed them. 
 One industry expert told me that the extra cost of refining and delivering bioethanol to the forecourt would be more than the 20p differential, so his company did not intend to develop it at this stage. 
 A major Government document has been produced on the subject, and it was also briefly discussed on the Floor of the House. Entitled, ''Towards a UK Strategy for Biofuels'', it just so happens to produce a justification for the figure of 20p. If one looks carefully at the justification, they realise that it is not a coherent argument for 20p. Frankly, it is difficult to come away with a view that it does anything other than cook the books. 
 I wonder why the Government did not decide to kick-start use of the fuel with a figure of at least 30p. One possible explanation is the cost. I have been given several estimates that indicate that that would cost a great deal. We must take into account behavioural effects, but I would be grateful if the Economic Secretary could give an estimate of the cost of introducing it at 30p, given some intelligent behavioural assumptions. I am worried that the measure is much more a sop to the environmental lobby than a fundamental shift in policy that will radically alter the market. I cannot be sure; all of us are guessing, but that is a major concern. 
 I have another concern that appears to point in the other direction. It relates to what I have consistently said about cost-benefit analyses. I worry that many changes are put through on alleged environmental grounds, yet the environmental arguments are far more complicated than what has been set out in consultation documents made available to the wider public, inasmuch as such documents are available. For example, I have been told that it would be far better if biomass were used for power generation rather than for biofuel, given the overall effect on carbon dioxide emissions. 
 I do not know whether that claim is true, nor do I know which numbers were involved in working out the overall economic and environmental effects, bearing in mind that CO2 emissions are only one part of the much broader environmental assessment that must be made. Again, the Economic Secretary did not really respond when I raised the point on another clause. Government policy, and public policy more generally, would benefit hugely if the Treasury—this will have to come from the Treasury—would give much more emphasis than it has hitherto to cost-benefit analyses of environmental measures in order to reassure the public that the Government are going in the right direction. Such analyses should be sufficiently robust intellectually and economically to convince doubters. 
 I do not believe that such information is in the public domain at present. It may be in some cases, but 
 in many cases it is not. The regulatory impact assessment and cost-benefit analysis process has become a bit stylised and lacks real clarity of thinking from first principles. I would be grateful if the Economic Secretary would comment on that. 
 There are one or two other points that I could make on bioethanol. I may come back to them, but I suspect that they will be made before very long by my right hon. Friend the Member for Fylde.

Michael Jack: With a build-up like that, I tremble to address the Committee. I never like it being cast about that I am an expert in anything. However, as Chairman of the Select Committee on Environment, Food and Rural Affairs, I have had the benefit of a fairly extensive investigation of biofuels. As well, with a debate on the Floor of the House on the subject and in this Committee today, particularly on bioethanol, we can say that we as parliamentarians have been exposed to a range of views.
 I have a slight difference of opinion with my hon. Friend the Member for Chichester. I do not believe that the Government have yet published the details of the case for 20p. The consultation document ''Towards a UK Strategy for Biofuels'' gives 20p as the number but does not actually produce any analysis as to why it is the right number. That serves only to emphasise the industry's claim that a figure greater than 20p—possibly as high as 34p but more likely 30p—per litre would be required to generate a supply. I wish to spend a few moments outlining why we should take that seriously. 
 I was struck by an earlier comment that the Economic Secretary made about natural gas and LPG and by how much weight he put on what industry told him. He is clearly a Minister who believes what it says. If we reverse the logic, we have an industry asking for an increase in duty reduction. I am sure that, as a fair man who takes a great interest in these matters, he will, when we put the arguments before him, at least agree to re-examine the case that the bioethanol industry makes for more assistance. 
 I will put the matter into context by explaining why it is important to have a bioethanol industry. We chuck around the names of new and alternative fuels and it sounds as though they are for those who are keen on different green things, but what we are really concerned about is the availability and price of mainstream hydrocarbon fuels. All kinds of problems could be solved if we concentrated on those. 
 Here is the background to bioethanol. First, the Government have made laudable attempts to reduce the amount of carbon dioxide in the atmosphere. They have just increased their own targets for said reduction. Against that is the background that CO2 emissions have been going up in the past few years. The Government acknowledge that one principal difficulty is the transport sector. One can but hope that our arguments in favour of bioethanol will persuade them that now is the time to be bold if they wish to achieve their policy objectives. Bioethanol would offer up to 70 per cent. reductions in CO2 emissions. If, in fact, we used straw or wood, as 
 lignocellulistic materials, as a feedstock for bioethanol, we could get a 100 per cent. reduction in CO2. The clause talks effectively about biomass, but I am not clear whether that, in definitional terms, takes into account those lignocellulistic materials. 
 The reason that is important is that it gives the Government the opportunity to achieve a further policy objective—that is, the reuse for beneficial purposes of waste materials. They have enough difficulty in meeting recycling targets under the European Union directives. Here is something that could be of benefit, in addition to the agricultural benefits that I will come to in a moment. So, one gets two hits for the price of one. 
 Let us consider for one moment bioethanol production in the United Kingdom compared with the rest of the world. The United Kingdom effectively does not have any recognisable large-scale production of bioethanol. Brazil, which exemplifies the most extreme use of that fuel, produces 125 million hectolitres of it. The European Union produces 3.3 million hectolitres, and Canada produces 2.38 million hectolitres. Europe, as a whole, is substantially behind leading countries such as Brazil and the United States in the use of that fuel. 
 Why does Brazil use it? It uses it as a way of taking up surplus sugar, which it is good at producing—its climate is excellent for growing cane sugar—but, more important, to give it not only an environmental gain but an element of fuel security. I remind the Minister that clause 1 of the Energy Bill, which the House will consider on Monday, tasks the Government with an obligation to secure the fuel of the United Kingdom. I do not want to be accused of alarmism because, at the moment, we are adequately supplied with hydrocarbon fuel, but if we wish to achieve the objectives of favouring the bioethanol industry, we need to recognise that we can get a third hit of helping fuel security by moving towards the generation of an indigenous industry. We have certainly got sufficient land on which to produce the raw material. 
 We have to move forward in that direction. The Economic Secretary will be aware of the United Kingdom's obligations under the European Union's biofuels directive. By 1 July this year, the Government must notify the European Commission of the volume of biofuels that the UK will use by the end of 2005. By 2006, they must give a further indication of the volume of biofuels that will be used by 2010. He will be aware that the targets are 2 per cent. by 2005 and 5.75 per cent. by 2010 and it is important that bioethanol is encouraged. As my hon. Friend the Member for Chichester said on the Floor of the House, we have discussed biodiesel during previous Finance Bill debates but it cannot, by definition, be used in petrol-driven vehicles as an element in a combined fuel stock. Bioethanol is the dilutant and must be used. 
 If we are to meet the target for 2010, the United Kingdom will be required to produce 1.2 million tonnes of bioethanol. British Sugar advises me that, from a standing start, that would require us to have 10 plants, each of which was capable of producing 100,000 tonnes of biofuels. A fourth hit is that, if the industry can be encouraged, it is estimated that for every one of those plants 970 jobs would be created. That could be an agricultural new deal—the Government are fond of new deals. The Opposition may disagree with the current, but I shall go with the flow of Government thinking and give the Economic Secretary as many reasons as possible for looking again at the clause. 
 I did not table an amendment to the clause to revise the duty rates because I want to hear in detail the Government's argument for their current position. The industry has made it abundantly clear that at 20p—the effective derogation of duty that the clause confers on biofuel—the industry will not be able to go forward and, with confidence, start production of bioethanol in this country. 
 What are the alternatives? British Sugar is considering a bioethanol plant in Poland where labour costs are much lower. There may be other inducements. There is an opportunity within the single market to sell bioethanol to a Europe that is starved of the raw material, but why is British Sugar thinking about making a substantial investment in a bioethanol plant in Poland? I have nothing against investing in Poland, but there are some imperative agricultural arguments in favour of a bioethanol industry in the UK. It is worth looking at those for a second or two. 
 The Economic Secretary will be acutely aware that the European Union has put forward proposals to reform the sugar regime. That presents a challenge to our sugar industry. Variations could open the European market to considerably increased importation of cane-based sugar products, which is a challenge to sugar beet producers in the United Kingdom. The one thing that is clear is that we can produce sugar beet, which is a fundamental raw material for bioethanol. If we met the 1.2 million tonne figure associated with the 5 per cent. target by 2010, we would need 300,000 hectares of land. That is not a problem. The Economic Secretary could have a fifth hit of benefit because land that is set aside under the new revised common agricultural policy could be used productively to produce sugar beet for the basic feedstock of the United Kingdom's bioethanol industry. 
 The only problem, which Ministers have offered as their line of defence to their current position— 
 It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Two o'clock.